Over the past few months, activity in the wheat market has been subdued, especially when compared with the volatility of its counterparts in the corn and soybean pits. It has traded in a relatively narrow range of 50¢ per bushel. Traders were focusing on the extremely wet spring in the U.S., which delayed both corn and soybean planting. While spring-wheat planting was running well behind the historical norm as well, it comprises only 27% of the total U.S. wheat crop. Winter wheat, which is planted in the fall and makes up the bulk of the U.S. wheat crop, was already nearing harvest during this period.
Although it does not receive as much attention, the spring wheat crop was planted late enough for some areas to miss the planting window altogether. Last year, planting was complete before the end of May. As of the most recent weekly crop progress report, only 92% of the crop was in the ground. On the other hand, prospects for yield have improved. The weekly report showed the good-to-excellent portion of the crop jumped by 6 percentage points from the previous week, to 68%. That compares with 76% last year at this time. Last year’s growing season was marred by severe drought, however, and by the end of summer, the final crop rating dropped to 61%. So it’s too early to draw any conclusions.
The much bigger issue is the quality of the winter wheat crop. It was a harsh winter for the key winter-wheat states. As the crop emerged from dormancy, the damage was evident. The most recent weekly crop progress report shows the good-to-excellent portion of the crop at a scant 31%. That’s down from 54% at this time last year. The harvest has been slowed down by the same wet weather that has affected planting across the U.S. Only 11% of the crop has been harvested, compared with 51% at this time last year and the five-year average of 25%. U.S. production levels for the combined winter- and spring-wheat crops remain vulnerable.
The USDA was curiously optimistic in its monthly crop report. The average of analysts’ guesstimates for the winter wheat crop was just a tad under 40 million tonnes, below the May estimate of 40.5 million tonnes. But the actual figure came in at 41.1 million tonnes, surprising traders and sending new crop prices to fresh recent lows.
On May 29, Japan, one of the largest importers of U.S. wheat announced that it was canceling wheat shipments from the U.S., because of the discovery of illegal genetically modified wheat on an Oregon farm. Other importing nations, such as South Korea and Taiwan, soon joined the chorus and said they would be reviewing its U.S. orders until the situation is clarified. The media were quick to point out that the $8 billion U.S. wheat export market was at risk if mass cancellations should snowball. Monsanto, the producer of the seed in question, stopped field testing for this product in 2005, and it was never available commercially, so it was indeed a mystery as to how the seed ever surfaced. Farmers from as far away as Kansas initiated lawsuits against Monsanto, claiming that it tainted the reputation of U.S. wheat, and that as a result, they would suffer millions of dollars of lost revenues.
In the meantime, Monsanto tested 30,000 samples of seed spanning 60% of all farms in Oregon and neighboring Washington State and did not find any of the illegal seed. On June 14, the USDA confirmed the company’s findings that the only instance was the original discovery on the 123-acre farm in Oregon. Initially it seemed as though this could turn into a larger issue that would depress U.S. prices, but the most recent weekly export report showed a normal flow of new sales. A lot of noise, but a non-event.
Overall, the outlook for 2013-14 global production is not quite as exuberant as it’s been over the past few months. For the most part, output estimates for the major Northern Hemisphere winter-wheat-producing nations were revised down from their May estimates. EU production was lowered by 1.3 million tonnes, to 137.44 million tonnes, while the estimate for FSU output was cut by 4.5 million tonnes, to 102.59 million tonnes.
The estimate for global production was revised downwards by about 5 million tonnes, to 696 million tonnes, which resulted in a drop in the estimate for ending stocks to 26.1% of consumption, down from 26.8% last month. Global inventories have been in a downtrend since they peaked at 30.9% of usage in 2009-10. Nevertheless, we are still very far from the bull market years of the mid 2000s when ending stocks plummeted to 21% of usage. Unless fresh dynamics are introduced into the market – a crop failure or an unexpected surge in demand – we expect the market to continue to trade in the confines of recent ranges. One note of caution: Funds are heavily short the market and sentiment readings are at 52-week lows. While there is no compelling reason to be long, it would be downright dangerous to be short.